UK’s Financial Regulatory Scrutinizes Cryptocurrency-Based CFDs

UK’s Financial Conduct Authority (FCA) takes a tougher stand on Cryptocurrency based retail trading in contracts for difference (CFDs) and other crypto related derivatives.

Contracts for Difference (CFDs) is an attractive form of derivative trading which facilitates investors to contemplate on the rising or falling prices of fast-moving global financial markets, like forex, commodities, indices, shares, and treasuries.

FCA proposed permanent measures like banning the sale of binary options and regulating sale and marketing of contracts for difference to UK retail customers, in line with expectations within the industry.

Christopher Woolard, FCA Executive Director Of Strategy & Competition said, “We remain very concerned about the harm to retail consumers that’s being caused by the design and distribution of some complex derivative products,”

FCAs move reflects decision taken by European Securities & Markets Authority (ESMA) on a temporary based across the European Union. FCA is also proposing to apply rules to ‘closely substitutable products’ including so-called “turbo certificates.”

Turbo certificates are also offered to retail clients by some European banks such as Commerzbank and Société Générale.

The FCA’s current proposals are identical to those outlined by ESMA, specifically:

  • Prohibition on the distribution, marketing or sale of binary options to retail clients.
  • Restrictions on the marketing, distribution or sale to retail clients of CFDs, including financial spread bets and rolling spot forex.

CFD positions would also be closed once a customer saw funds drop to 50% of their margin needed to maintain their open positions in customer’s account. Security would also be put in place so that a client cannot lose more than total funds in their CFD account.

FCA estimated that the new CFD rules could reduce annual losses for retail consumers of UK firms by between 267.4m Pound and 450.7m Pound, while the binary options ban could save 17m Pound a year.

FCA said it would relax the cap on borrowing for CFDs linked to certain government bonds and it also said it would launch a consultation in early 2019 into a potential ban on the marketing and sale of cryptocurrency-based derivatives.

The regulator (FCA) also welcomed feedback on whether any other derivative products could benefit from similar rules as CFDs.

UK’s financial regulatory body (FCA) proposes a ban on cryptocurrency-based CFDs

Firms who are selling such CFD products, including IG Group Holdings PLC, CMC Markets PLC, and Plus500 Ltd will no longer be able to incentivize trading, a standardized risk warning will be implemented regarding potential losses.

IG Group Holdings PLC said in a statement that the new proposals were “anticipated by the company, and do not change the company’s expectations on performance or group revenue”.

CMC Markets PLC said it did not offer CFD substitute products, and that revenues from crypto-CFDs were “immaterial”, so the changes would “not have a material impact on the group”.

Shares in CMC Markets and IG Group rose 2.5 and 2.6 percent respectively while shares in Plus500 Ltd, which offers the broadest range of cryptocurrency-CFDs, fell to 5 percent in early trading before recovering to trade 1 percent higher.

Plus500 Ltd said it was “already compliant” with the CFD and binary options rules and that cryptocurrency-CFD did not “represent a significant proportion of the company’s revenues”.

Does UK’s proposed ban on Cryptocurrency-CFDs impact the business of crypto firms or will they adhere to FCA? Share your thoughts in the comments.